Tuesday, January 28, 2014

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a district court's dismissal of a consumer class action that challenged credit card overlimit and late fees as prohibited by constitutional limits on punitive damages. The Ninth Circuit held that the overlimit and late fees were permissible under the National Bank Act and the Depository Institutions Deregulation and Monetary Control Act, and that substantive due process arguments do not apply to private contractual penalties such as credit card penalty fees.

A group of consumers challenged credit card overlimit and late fees on constitutional grounds. The consumers contended that those fees were analogous to punitive damages in the tort context and thus subject to the substantive due process limits set forth by the Supreme Court in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996). The Ninth Circuit characterized its task as determining "whether substantive due process so constrains credit card fees."

The class consisted of credit card holders who had contracts with issuers of consumer credit cards. The consumers alleged that the overlimit and late fees vastly exceeded the harm the issuers actually suffered as a result of the consumers exceeding their limit or making late payments.

The consumers' complaint raised ten causes of action. The claims at issue before the Ninth Circuit were that the overlimit and late fees violated the National Bank Act, 12 U.S.C. §§ 85-86 ("NBA"), and the Depository Institutions Deregulation and Monetary Control Act, 12 U.S.C. § 1834d(a) ("DIDMCA") because, according to the consumers, the NBA and DIDMCA did not authorize fees that constitute unconstitutionally excessive punitive damages. The appeal also addressed the consumers' allegation that the fees violated California's Unfair Competition Law, Cal. Bus. & Prof. Code §17200 et seq. ("UCL").

The Ninth Circuit analyzed the statutory framework of the NBA and DIDMCA, and confirmed that under both statutes the card issuers had the right to (i) "export" interest rates by charging the rates permitted by the state in which the card issuers were located, even if the consumer resided in a different state with more consumer-friendly regulations and (ii) charge overlimit and late fees as long as the fees were legal in the card issuers' home state.

The consumers argued that the fees were unconstitutional because they violated the principle established by the Supreme Court in Gore that an award of punitive damages many times greater than the compensatory damage award will "raise a suspicious eyebrow."

In providing its substantive analysis of the consumers' claims, the Ninth Circuit recognized the issue involved the distinction between liquidated damages provisions, which are generally enforceable, and punitive damages provisions, which are generally unenforceable, in contracts.

The Court defined liquidated damages as "a predetermined sum which a party to a contract agrees to pay in the event of his breach" and determined that liquidated damages provisions are enforceable "if the damages flowing from the breach are likely to be difficult to ascertain or prove at the time of the agreement and the liquidated sum represents a good faith effort by the parties to appraise the benefit of the bargain." Unenforceable punitive damage provisions, on the other hand, are defined as where "a party agrees to pay a sum in the event of a breach, but which is designed not to estimate probable actual damages but to punish the breaching party or coerce his performance."

The Ninth Circuit further concluded that punitive damages are generally not recoverable for breach of contracts and generally not allowed without an award of actual damages. The Ninth Circuit also acknowledged, however, that "to the extent punitive damages are permitted in contract actions, such an award is subject to the limitations of the federal Constitution."

Applying these recognized principles to the consumers' argument that the high penalty interest rates properly compensated the credit card issuers and the overlimit and late fees constituted "double-dipping," the Ninth Circuit concluded that the fees at issue originated from a private contract, not a jury-determined punitive damage, thus distinguishing the circumstances from those in Gore.

Because the fees at issue were purely contractual, the Ninth Circuit concluded they were not subject to constitutional due process analysis. As to the claim under the California UCL, the Ninth Circuit held that the UCL created a cause of action for the violation of other state and federal laws. And because the Ninth Circuit concluded that the card issuers' conduct did not violate the NBA or the DIDMCA, there was no derivative liability under the UCL. Thus, the Ninth Circuit affirmed the district court's dismissal of the consumers' action for failure to state a claim.

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Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.